The enduring popularity of dividend-strategy funds means exchange-traded funds like Schwab U.S. Dividend Equity ETF (SCHD) are competing in one of the most crowded areas of the industry. Schwab recently cut this relatively young fund's expense ratio to 0.07%, making it the cheapest dividend ETF available. Its price isn't the only thing that recommends it, however. This dividend-focused ETF targets stable stocks that pay moderate, sustainable income. The resulting portfolio is one of the most quality-oriented among dividend ETFs, with almost all holdings earning either a wide or narrow Morningstar Economic Moat Rating. SCHD's portfolio also has high projected earnings growth relative to competitors and a conservative payout ratio of under 50%. We think this fund is an appropriate core holding for most investors, even in the face of rising interest-rate concerns.
SCHD's closest alternative is VIG, which charges 0.10% and selects stocks that have increased their dividends over the past 10 consecutive years. VIG has a quality tilt and yield similar to SCHD's. Another offering from Vanguard is Vanguard High Dividend Yield Index ETF (VYM), which also charges 0.10%. This fund sorts U.S. stocks by yield and market-weights its holdings. VYM has a smaller quality tilt than SCHD or VIG but has a higher yield.